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Morningstar | Yamazaki Failing to Expand Margin Despite Price Hikes

The 30%-plus drop in profits in 2013 was a wake-up call to Yamazaki, which has since doubled its operation margins after rolling out a groupwide plan to revamp operations. A change in its product strategies to emphasize the selected 100 core products and expand offerings in the premium and economy segments, along with a sizable reduction in stock-keeping units, or SKUs, has not only helped restore profits but also boosted operating margins to the highest level over the past decade.The ability to provide a wide variety of products is Yamazaki’s key edge. The mounted SKUs, on the other hand, have caused operational inefficiency and thus depressed margins. Despite a 20%-plus cut in SKUs over the past three years to fewer than 1,200 items, there seems to be room for the firm to trim the number of units, given that the number of products available at any given retailer is usually less than 3% of Yamazaki’s total SKUs.Increasing bread consumption, resulting from changes in Japanese consumers’ lifestyle and rising demand for convenience, plays in Yamazaki’s favor. To capture this growth and boost its share in Western Japan, where it is underpenetrated, the firm is building a new factory in Kobe, its first in 28 years. In addition to expansion at the core C-store and emerging drug-store channels, the new plant will save on logistics costs from transporting products from other regions.On the struggling c-store operation, Yamazaki has determined a retail repositioning strategy by adding fresh-out-of-oven bakery products to the loss-making Daily Yamazaki stores. The new strategy seems to help mitigate losses, but fierce competition and rising labor costs may make it harder for Yamazaki to turn the business profitable.We consider improvement in logistic efficiency the most critical issue to be addressed, and we believe this will serve as an effective means of lifting margins. Surging costs have been eroding margins. We believe there is plenty of room to cut back delivery frequency from twice a day to once at some retailers, which could boost margins by 50-200 basis points. Yet operational disruption appears to be a key concern, preventing management from taking any action.